Thursday, August 26, 2010

Marvell Technology Group had a mixed fiscal second quarter (Q2) 2011 ending July 31, 2010. Revenue fell below prior guidance. On the other hand it was was $896.5 million, up 5% sequentially from $856 million and up 40% from $640.6 million in the year-earlier quarter.

Wall Street was not suprised at the short fall because the PC supply chain was believed to have hit the pause button in July. Marvell's biggest product segment is semiconductor chips that go into hard drives (HDDs) for data storage. HDD revenue was 15% down sequentially from Q1. There had been supply constraints over the last year, and as a result HDD manufacturers had overbuilt inventory preparing for back to school sales. This was largely from the Europe economic effect, not so much an actual downturn in demand in Europe as cautious inventory control by spooked CEOs. Marvell management believes consumption of excess inventory is mainly behind, as orders rose again towards the end of July.

Making Q2 not such a bad quarter was the long-promised ramping of Marvell products for the mobile/wireless markets. This segment saw an over 50% sequential jump (and up 140% y/y) as silicon was shipped for a number of new products that consumers (mostly in Asia) will see in Q3. About 15% of sequential growth was due to to an Armada based product, with a single customer getting ready for a game product introduction. 30% of sequential growth was due to a cell phone processor for a customer ramping a new product. 55% of sequential growth was for embedded Wi-Fi, which is a market the Marvell has been successful in for some time, and is still building on that success. Management believes it will see 15% to 20% sequential growth in Q3 in the mobile and wireless segment.

Earlier this decade Marvell made very large commitments to R&D and also made some acquisitions that analysts questioned at the time [See Marvell's Huge Research and Development Budget August 24, 2007]. Now we are seeing fear in the hearts of competitors in a slew of fields that Marvell did not even play in five or ten years ago.

Take one known example from the mobile device market. Hawang has been producing eReaders for the Chinese market since 2008. The Marvell based model is due out by September. According to Hawang it offers "better performance at a better price ... true mass market pricing." This is possible because of Marvell's intellectual property and ability to put many functions on a single chip. Notably this single chip solution (SoC - System on a Chip) includes an integrated e-Paper Display (EPD) controller. It can display standard pdf documents and requires very little power. I also expect we will see OEM announcements of tablet computers that are based on Marvell chips as we progress through the year. These may be in Asian markets, but some should be available in the U.S. Keep in mind that this is a very competitive market. In addition to Apple's internally developed A4 chips (which almost certainly won't be sold to competing OEMs), top competitors include Broadcom, Qualcomm (Snapdragon chips), Intel, TI, and Freescale.

With its low-power application processors, cell phone modems, wi-fi and bluetooth technologies, all possibly on a single chip, Marvell has apparently won a leading position in China's new Ophone (smartphones for new cellular signal standard) production, which should begin ramping around the beginning of 2011. That, in itself, will be a huge business.

Another space that Marvell is already competive in and may dominate sooner than you think is Ethernet switching. This has become increasingly important with the proliferation of datacenters and cloud computing.

Most intriguing is the idea that Marvell is going to use products intially developed partly using the Intel division it acquired to go after the server market. Marvell is not the only company that can see using ARM architecture to design servers that sip power, but it does bring a formidable amount of talent to the table. Let's see: really fast, very low power consumption processors, networking chips, and storage chips. Sounds like the makings of a cloud datacenter to me.

Probably my favorite thing about Marvell managment is that they think long term. They have proven they can take a concept, get out a product a few years later, and dominate a market a few years to a decade after that. You might want to take notice of Marvell now, because by 2012 everyone will be noticing.

The sky is falling. Or maybe it isn't. The inventory of new homes was 210,000 or so at the end of July. This is in contrast to the vast inventory of used homes for sale.

Suppose that for, whatever reason, the U.S. economy begins to normalise this fall. That would return the annual new home sales rate to about 600,000.

Which means all of the current inventory would disappear at a rate of 50,000 homes per month, less however many homes per month could be built.

Another way to think about it is in terms of new homes per population unit. Divide the nation into 100 markets of 3 million persons per market. Divide the inventory into 100 parts. You end up with 2,100 new homes available for every 3 million people. Or 2.1 homes per 3000 people. Or 0.7 homes per 1000 people.

Sure, we could slide back into recession. But counting all the downside risks without looking at the upside risks is as foolish as investing by looking at only the upside.

Even the used housing inventory, as vast as it looks at the moment, would not amount to much if the economy started reviving.

In June many American business executives caught the I Don't Do Greek panic and paused in hiring and other expansion plans for July. But in talking with a variety of CEOs, or hearing them on analyst conference calls, most saw little impact on their actual sales in Europe. A couple said they did well in Germany, which turned out to predict the recent Good German economic statistics.

Panic, or even lack of confidence, can cause or exacerbate a recession. Good leaders don't panic, because it leads to poor long-term decision making. Predicting whether business leaders as a whole will panic is not easy art. A good assumption is that there are both downside risks and upside opportunities in the situation.

August numbers will be skewed by vacations. Watch the September numbers closely. If consumer demand and industrial production start rising again in the U.S., you won't have long to buy up stocks at low prices or scarce assets like cheap, newly built houses.

Monday, August 23, 2010

On August 18th Applied Materials (AMAT) released Q2 results and held the analyst conference call for the quarter. For those trying to see where the electronics industry is heading, it was an important call.

Consumers choosing new computers, smartphones, and big screen displays recognize a limited number of brand name device makers like Apple, HP, Sony, Dell, Nokia, etc. Each of their devices is engineered from a number of components including the casings, displays, and electronic parts. A wide variety of semiconductor parts makers like Intel, AMD, Broadcom, Qualcomm, Marvell, TI, etc., compete to be chosen by the device maker; those are the design wins that point to whether a semiconductor company will grow or fade.

The semiconductor chips themselves are made with specialty capital equipment that must lay down the microscopic circuits that make the magic happen. Every few years the size of the circuit elements decreases, so fabs (after fabrication factories) must buy new capital equipment to provide for cutting edge chip production. A number of steps and hence machines are involved in the process for creating silicon wafers, cleaning, making masks, infusing them with dopants, adding insulators, etching, etc., and testing. As you may have heard lately from, for instance, NVIDIA, when new machines start to come online it often takes time to get them working well enough that the number of defects decreases to the point that most of the chips work when tested.

Applied Materials makes equipment to make semiconductor chips, solar panels, and LCD display panels. 2009 was a dry year. With end consumer (including industrial consumers) demand down for electronic devices, the fabs had plenty of capacity. Orders to AMAT consisted mainly of a few forward-looking fabs that knew that they had to keep shrinking transistors to serve their clients with the most advanced technological needs.

2010, on the other hand, has seen enough return of demand to restart the cycle for Applied. A lot of older production technology was taken off line in 2009. Now most fabs need not just new technology but capacity expansion as well.

Applied Materials has competition in each of its lines, some more so than others. With revenues of $2.52 billion in Q2 2010, up 10% sequentially from $2.30 billion and up 123% from $1.13 billion in Q2 2009, you can see the difference a year makes.

However, management is predicting that Q3 revenue will be flattish to up 5% over Q2. The main semiconductor equipment business is expected to be about flat. Services revenue looks up 10%. LCD display equipment revenue could be up 20%. But there will likely be a 10% to 20% drop in crystalline solar revenues. In addition the thin-film solar (SunFab) business is being reorganized because few governments, banks and companies wanted to take the risk of creating the very-large scale plants required for efficient thin-film operations.

Because fabs are scrambling to deal with current demand levels, a mild softening in the world economy would not cause them to put off plans to buy new equipment. In fact, it could take another year just to catch up. If, like me, you believe a gradual re-acceleration in the global economy is the most likely scenario, then this up cycle for Applied and other semiconductor equipment manufacturers is still in its opening phase.

If non-GAAP comes in at the middle of the guidance range, $0.30 per share, that would annualize to $1.20. At today's closing price of $10.99 per share, investors will be getting earnings of 10.9% per share. That sure beats the returns on bonds and CDs.

Sunday, August 22, 2010

According to people who aggregate such statistics, in 2010 investors small and large have been, on the whole, moving money out of stocks and into bonds and gold.

They are selling low and buying high. That is what I expect of them. If enough people do that, it allows some of us to buy low and sell high. Which is why I bother with stocks: if you can't generate a good return on an investment, you might as well let a bank or credit union give you almost nothing for your savings, while lending you money out at exorbitant interest rates.

There are really big, flashing neon signs saying that many if not most stocks have bargain basement prices right now. Take the semiconductor sector. Eliminate the loser companies. Look at, for example Microchip (MCHP) and Marvell (MRVL) which I own, or Intel (INTC), Analog Devices (ADI), Maxim (MXIM), etc. which I don't own. Almost all, at Friday's closing prices, have forward price to earnings ratios in the vicinity of 10. That means buying a share of stock is getting you 10% earnings per year. Even if the economy stays relatively flat. Many of these companies are growing profits so quickly you could get effectively 12 to 15% by 2012 if you invested Friday.

Need I say how that compares to investing in CD's, or bonds, or the housing market? Or gold, which earns nothing, and is in a bubble that will burst soon enough?

It is true that at any given time stocks are subject to auction marketing prices. What that means is that the price you get if you buy or sell may not recommend fundamental value. You may get a lot more or a lot less than fundamental value. There is no guarantee what an auction market will do any given day, month, year, or decade.

Which is why smart, long-term stock buyers pick stocks individually and try to do most of their buying when the stock market as a whole is low. When the stock market is high bond markets are (usually) low, meaning bonds carry high interest returns. So the classic cyclical smart thing to to is to sell your bonds (a portion of them, anyway) during recessions (that is selling high). Use the bond returns to buy stocks (buying low). When you get into an obvious bull market, you sell some of your stocks (selling high) and buy bonds again (with high interest rates, which means low cost).

But as simple as this is, and as easy as it is to do with portfolio balancing, most people can't do it. Institutional investors can't, individuals can't, rich can't, not so rich can't. We are human. We get excited by a rising stock market. We buy when we should be selling. We get frightened by a fallen market, and get sell when we should be buying. Brokers don't care, they take their commissions whether you sell or buy.

Keep in mind, for all of this, that individual companies vary greatly against the background of the overall stock market. A company that does well (growing revenues and profits) during a recession may not show off as an investment until the next bull market. But the real value is in the profits, not in the stock price.

Do your own research, including checking what other investors are saying. It is easy and free these days to look at the financial histories of companies, read SEC filings, find out what other investors thing, and even tune into analyst calls.

I like a low stock price when I am buying, and a high price when I am selling, same as anyone. But by focusing on value and keeping fundamental, well-known rules in mind, I keep out of trouble and get way better returns on stocks than I do on my CDs (which I keep, despite the low interest rates, to smooth out my personal finances, since my income varies greatly month to month, and they help with occasional large expenses).

Microchip specializes in microcontrollers, which are semiconductor chips that have, at minimum, a computer and the ability to send and receive control signals integrated on a single chip. Microcontroller are a big, if largely invisible to consumers, part of the global semiconductor industry, and Microchip has become the industry leader over this last decade. If something needs to be controlled, whether it is the temperature of a home refrigerator or the intricate chemical manipulations of a gene sequencer, a microcontroller will be present. Modern automobiles typically contain over a dozen microcontrollers.

Basic microcontroller (MCU) technology is less complicated than the CPUs and GPUs of personal computers, but the chips are often specialized for the wide variety of tasks they are required to perform. The most basic division of microcontrollers is into 8-bit, 16-bit, and 32-bit, which reflects the size of the data chunks that are processed by the computer aspect of the chip. Microchip is the market share leader in the 8-bit segment, which is by far the largest segment. Microcontrollers are workhorses for engineers; there is a disadvantage to using a 16-bit controller when an 8-bit controller will get the job done. Once you have picked your data path size, usually the next consideration is memory size. Memory is increasingly on the microcontroller chip itself, but they also integrate easily with external memory. The controller part of the chip, at its simplest, has connections that either see if an input is on or off, or control an output that is either on or off. But increasingly the ability to measure a variable voltage, or convert to a specified output voltage, can be built onto chips when desired.

As a result Microchip has hundreds of standard models of microcontrollers to chose from, as well as being able to make specific configurations to order. In the industry as a whole thousands of types are available. Top competitors include Renesas, Freescale, Infineon, Fujitsu and TI. Architectures of the CPUs of microcontrollers tend to be proprietary, but several companies base them on ARM designs. Microchip's is called PICmicro.

Microchip navigated the economic downturn quite well. While revenues shrank, because it was in a strong cash position, it kept up its research and development efforts, as well as sales. In addition it used cash to make some acquisitions, most recently Silicon Storage Technology (SST). You can see the results in 66% y/y revenue growth, with GAAP net income more than doubling. Microchip has also ventured into areas like analog chips where it can help its microcontroller customers or integrate the analog components into microcontrollers.

The microcontroller industry is likely to continue to consolidate as some small players are unable to operate profitably. While microcontroller designs can linger far longer than PC CPU designs, a healthy R&D budget is necessary to keep up with new market needs. In particular cramming more functionality into a smaller form factor operating at lower voltages and power consumption is a trend that still has a ways to go.

Microchip's profit margins were healthy in Q2, it book 1.4 times the business that it billed out, and it is adding manufacturing capacity to keep up with demand. With no disruptive technology on the horizon, the best managed companies will continue to forge ahead in the microcontroller space. With Microchip's stellar management record, while it is always possible something could go wrong, the future seems reliably bright. In Microchip's case, it also comes with hefty dividend payments.

Monday, August 16, 2010

Last Thursday, August 12, 2010, NVIDIA (NVDA) reported its results for the quarter ending August 1, 2010, its second fiscal quarter of 2011. The results could be taken as a glimpse into July for the semiconductor industry since most other companies in the space reported second quarters ending June 30th. There is a concern that the recent boom in chip sales could slow appreciably because of slowing (but not really reduced) end demand by businesses and consumers.

Here I want to discuss the big trends engulfing Nvidia and the future of computer processing, including graphics processing. If you are interested in details of Nvidia's 2nd quarter, see my NVIDIA Q2 Analyst Conference Call summary.

Since graphics on personal computers began to be important in the late 1980s there has been a divergence between the central processing unit (CPU) and the graphics processing unit (GPU). Fans of history may recall that before that there was a similar divergence between the CPU and the floating point processor (FPU); you could pay extra for a computer with an Intel 8087, if you wanted to do math, or use math to accelerate graphics calculations.

This divergence between general computing needs and floating point math and graphics needs is fundamental. In an era that may be coming to a close Intel and AMD (and once upon a time, Motorola) produced most of the CPUs for the industry while ATI (now part of AMD) and Nvidia made the graphics processing unit. Many computers had no GPU, allowing the graphics work to be done by the CPU, which is fine for slow work like word processing. Intel, Nvidia and AMD also all made motherboard chipsets that included some GPU capabilities. As usual, those became more capable with time. Your $1000 GPU card of 2000 is not as powerful as the lowest end Intel graphics of today. On the other hand graphics demand has gone up with both the introduction of high definition video, fast rendering needs of games, and graphic content production systems. You don't want Intel graphics for any of those.

Conversely, the powerful GPUs from Nvidia and AMD can now be used to accelerate many processes that CPUs do more slowly. Mostly scientists, engineers, and graphics designers are taking advantage of these capabilities, but they will trickle down towards the mainstream. Moms may use them to convert an HD video to lower definition, or vice-versa.

For the most part FPUs were killed when floating point processing started being integrated into CPUs like Intel's Pentium. As transistor sizes shrank, and Windows became the common operating system, that became a natural way to give users more for their dollar.

2010 is the year that GPUs and CPUs are being merged onto a single chip. Unless you are an industry insider, you won't see the products until 2011.

Because high end GPUs actually use more silicon space than the current CPUs, there will continue to be life for independent GPUs, typically on video cards, for at least a few years. Video and graphics content makers, scientists and engineers will want workstations that include both a high end GPU and a high end CPU card. But the rest of us will probably migrate to the new combined cards (AMD calls them APUs, advanced processing units) between 2011 and 2015.

While Intel might be behind AMD in graphics, I would not want to bet on its losing a lot of market share in the new combined CPU/GPU arena. Intel's profits dwarf AMD's revenues, and their R&D budget is correspondingly higher. They will find ways of keeping their market share, most likely.

For Nvidia there is a bigger problem: they don't make GPUs at all. But before addressing that, let's look at the new tide coming in: mobile processing, mostly based on ARM-based processors.

Mobile devices are rapidly becoming more powerful, as you can see from the iPad, iPhone, Droid, etc. The key is low voltages with corresponding low power consumption, plus the usual shrinking of transistor sizes making it possible to integrate more processing capabilities into the processing units.

It is conceivable that just as PCs wiped out minicomputers and even, for the most part, mainframes, the new mobile CPUs could start invading the notebook, desktop, and even server computer space. It is already being tried, the reasoning being that a swarm of small, low-energy units can make ideal virtual machines for serving web pages.

Nvidia has the Tegra platform, which you'll be seeing a lot of later this year. It integrates an ARM CPU, an Nvidia GPU, and motherboard chipset functions on a single chip. It is a beautiful piece of work.

It also appears to be winning out over AMD in the high end GPU for non-graphic computations market.

I am not ready to declare the long line of evolution from 8086 chips to be over. They may just absorb what is best, and morph to meet changing user needs. But the competitive dynamics are certainly going to change in the next few years. If Nvidia's Tegra is a competitor, so are chips from Apple, Marvell, Broadcom, Qualcomm, TI, and many others. In fact too many companies have pinned their hopes on ARM processors. Even if ARM becomes the architecture of the future, it is likely that a couple of these companies will gain a marketing or manufacturing advantage, and the field will narrow over time.

Nvidia's best hopes for future profits are probably in specialized graphics processors for high-intensity computing. These may no longer be necessary for the average person's desktop or notebook, but high-end GPUs are subject to much less competition and therefore have higher profit margins on each unit sold.

Friday, August 13, 2010

On August 5, 2010 TTM Technologies (TTMI) reported its second quarter results. TTM is the American leader in printed circuit board (PCB) manufacturing. And for the quarter, because of its acquisition of (or merger with) Meadville, its revenues more than doubled since Q1.

Like many technologies, the making of PCBs is rapidly changing. Components are becoming smaller. The number of interconnections has been increasing geometrically, requiring multiple layers of conductors to get the job done. Manufacturing has changed too. For instance, mechanical drills are being replaced by lasers. Just a couple of decades ago engineers designed a system around its electronic components, with the PCB that held them almost an afterthought. Now PCB engineering is critical to the success of high frequency, low voltage devices.

Global manufacturing of electronics is also changing. You may be surprised to learn that many electronic devices are still made in the United States. The change is that these are made in relatively low volumes; they are typically specialty devices for the industrial market. Most high-volume consumer devices are made in lower cost nations like China, where the creation of PCBs and loading them with components are crucial steps.

For years TTM's management has talked about buying an Asian company to complement their business. Typically TTM, like other companies, did prototype PCBs. If a company was making only 1000 or maybe 10,000 devices (say a medical laboratory device), it would probably have the actual production runs done by TTM in addition to the prototypes. But at some scale it made sense to take a PCB board proofed by TTM to China to do a large production run. Of course TTM wanted to capture this missed profit opportunity, but it made no economic sense to build large production run PCB plants in the U.S.

Meadville, meanwhile, had a very successful business, headquartered in Hong Kong but with factories in mainland China, doing large scale production runs. Meadville borrowed large sums of money to build its production capacity over the past decade. For the most part this was not low-end stuff. For instance, one of Meadville's largest clients was Apple.

The combination makes a lot of sense. The most advanced technologies quickly become consumer technologies because consumer devices are migrating to being mobile and handheld, requiring shrinking the entire system. TTM, with its experience with high-end technology prototypes, can take a global manufacturer through the entire process now. They help design and debug prototype PCBs, can do small production runs in the U.S. If a company needs a million devices per month, there will be a smooth transition to Asian manufacturing.

It will probably take about a year for this model to show its stuff. Rapid as technological change is, it can take a year or two for a specific device to go from the design stage to the production stage. Also TTM's China facilities are already running at near capacity. They need even more high end PCB production equipment to keep up with demand. Capital expenses can easily be paid out of cash flow, which is very healthy. TTM has gone from being almost debt free to having substantial debt, but the financing terms from Hong Kong banks are liberal. I believe TTM will be able to rapidly pay down the debt.

Of course this is a competitive area, and things could go wrong, but it looks like the right strategy for the PCB industry. In the U.S., in particular, the industry is consolidating because many of the smaller companies can't afford to invest in new equipment like automated laser drilling machines. TTM is likely to pick up market share both in the U.S. and China.

Tuesday, August 10, 2010

Hansen Medical (HNSN), which makes robotic catheters for medical procedures, reported $7.0 million revenue for Q2 2010. That is up 159% sequentially from $2.7 million, and up 133% from $3.0 million in the year-earlier quarter.

Unfortunately, while Hansen's long term prospects are good, we are not likely to see a continuing rapid revenue ramp in Q3 or Q4 of 2010.

Hansen's major source of revenue is new Sensei Robotic Catheter Systems, which are currently approved by the FDA for cardiac arrhythmia EP (electrophysiology) procedures. Hansen recognized revenue for 7 systems in Q2, but shipped only 3 systems to customers. Hansen does not recognize revenue on systems until they are in place, working, and physicians have been trained to use them. At the end of the quarter it had a backlog of 14 systems in the field that had not been recognized for revenue.

In comparison, in Q1 Hansen shipped 7 systems but only recognized revenue on 1 system. So for the first half of 2010 10 systems were shipped and revenue was recognized on 8.

These systems run $650,000 to $700,000 each, and are relatively new to the medical community, which has had tight capital equipment budgets the last few years. So both shipments and recognition of revenues vary widely by quarter. That is likely to continue until robotic catheters are adopted for more types of procedures.

There are two main near-term areas where Hansen could sell more robots. The closest is for Atrial Fibrillation (AF) therapy. A clinical trial is already enrolling patients, but results are not likely until well into 2011.

Most promising is using robotic catheters in vascular (blood vessel) procedures. Philips is partnering with Hansen for this, providing partial funding. But this is a development phase product, with no certain plan for clinical trials at present.

Hansen investors will need to be patient. Electrophysiology alone might ramp to a profitable business over the next two or three years, but serious money is unlikely to be made (this is my opinion) until 2012 and after.

On the good side, the stock is dirt cheap. On the cautionary side, nothing guarantees that Hansen will sell more robots for EP, or get FDA or European approval for AF or vascular procedures.

Monday, August 9, 2010

Onyx Pharmaceuticals stock rose 3% today to $28.11 per share. Lately it has been on a bit of a run, after hitting a near term low of $20.37 on July 19, versus a 52 week low of $19.54. This was not, in particular, due to Q2 results reported on August 8. GAAP net income for the quarter was negative $97.2 million. Taking away a $92 million charge for a carfilzomib milestone being reached, Onyx still lost $5.2 million GAAP. Non-GAAP net income was $2.9 million, not much to crow about either.

As I have discussed before, Onyx could have had a nice profitable business if they had just stuck to selling Nexavar for kidney and liver cancer. Nexavar sales are still growing, mainly internationally, since it has taken time to get approvals in many nations. But instead of ramping some profits, and the short term stock price, management decided to use cash to do studies of Nexavar for more forms of cancer, and to acquire companies or drugs to broaden their pipeline. R&D expense in Q2 was $43 million.

In pharmaceuticals and biotechnology research and development is a risky business. Drugs can fail in stage I clinical trials, or in Phase II or Phase III trials. Good Phase III data can be disputed by the FDA, as we saw with Dendreon's Provenge. And drugs that have been on the market for years can be brought into question. Plenty of examples there.

So the strategy mapped out by Onyx management could just amount to blowing profits. Or it could be the beginning of a round of new profits. You can look at the data and make educated guesses, but you can't know for sure. If we could know for sure, we would not need double-blind clinical trials. Wise biotech investors want diversity. You can get this by spreading your bets over many small companies, or by investing in companies that have pipelines with multiple good candidates. You can bet some candidates will fail, but a company has, say, five candidates with good Phase II results, it is unlikely that all of them will fail Phase III trials. It is a probability-driven business.

Which brings us to carfilzomib for multiple myeloma. Onyx bought the potential therapy, partly for cash and partly for further payments if positive milestones are reached, because they looked at the early data and the commercial potential and thought they were making a good bet. They could have been wrong, they could still be wrong, but recent data pushes us strongly in the direction of being winners. You can learn more from the July 26, 2010 carfilzomib press release.

The hope is now that the FDA will approve carfilzomib for multiple myeloma based on the data already available. But if that does not happen, Onyx would just design and conduct a Phase III trial (or two). That is more expensive and takes longer, but it would still lead to approval if the data is good.

Add that to the possibility that Nexavar will prove to be a therapy for cancers beyond liver and kidney, and you have the potential that Onyx will be, in five years say, a company that you wish you had bought when the stock was cheap.

Sunday, August 8, 2010

On July 28 Akamai Technologies held its analyst conference call and reported second quarter 2010 results. You can read my detailed notes on the call at Akamai Q2 2010 Analyst Conference Call.

Before the call there was a lot of buzz about spectacular results fueled by people watching the World Cup over the Internet, which means on Akamai-accelerated services. As management has said in the past, no one event, not even the World Cup, is going to have a significant impact on revenue in a quarter. In Q4s the holiday-driven advertisement traffic does push up Akamai's numbers, but again this is a macro effect, not due to any one customer.

Akamai had a high P/E ratio comparted to most other growing technology companies both before and after the non-event driven spike, but it is not high by historic standards. Rather, the other tech stocks are low. Still, selling a high P/E stock and buying an all-other-thing-equal but a low P/E stock is a good way to reduce risk. So the sell off after Q2 results were reported is not a big surprise. The results were good, but some short-term investors were deluding themselves as to how good. The stock was in the 40s in most of June and July, only to fall below 38 after the conference call.

Aside from P/Es returning to normal, which will help all stocks, Akamai has a lot to recommend it. The internet continues to grow and commercial customers need reliable, fast delivery. Whether it is ads, online stores, or video feeds, the Internet works much better over Akamai's system. In the future revenues should grow more quickly than either Akamai's capital expenditures (mainly on servers) or operating expenses. The increased use of high-bandwidth mobile devices will also grow Akamai revenues.

On the negative side AKAM's real tax rate is going up, mostly in 2011, as it uses up its NOLs (losses from startup years).

But keep in mind this growth will be relatively steady, with extra acceleration every fourth quarter. One time events won't matter too much.

Saturday, August 7, 2010

On August 3rd Dendreon had its first analyst conference call where revenues for Provenge were reported. I bought the stock back in 2005; Dendreon had been public well before that, and also had a venture capital phase. This shows what time frames can be like in the development of drugs and other therapies.

Revenues for Provenge for prostate cancer commenced in May, but the bulk of Q2 revenues came in June, bringing the total to $2.8 million. The good news is that in July revenue was $5.2 million. No specific guidance was provided, but I would expect Q3 revenue above $20 million. Meanwhile the first Provenge facility (New Jersey) is having its capacity quadrupled, with full capacity expected to be available in early 2011. Run rate is expected near $1 billion per year, or $250 million per quarter. Two additional production facilities will be built, but that will take into 2012. Note that Provenge is not a drug. The facilities boost the immune response of patients' blood.

A concern of investors was that, given that the Provenge treatments cost $93,000 (3 blood treatments of $31,000 each) and, like most cancer therapies, do not help everyone, it might be difficult to obtain private or Medicare reimbursement for the treatments. In particular the decision by Medicare to do a national review has led to uncertainty. Management named specific private health insurers that have approved Provenge and said all but one local Medicare regions that have considered the issue have given the go ahead for reimbursement. When Medicare makes a national ruling it will apply to all regions. So there is a small upside and a major downside to the actual ruling. I think Medicare will approve Provenge because of its benefits and safety, but no one can guarantee that right now.

That said, Dendreon is lucky to have a large cash reserve put together when investors were excited by the FDA approval of Provenge. They are burning rapidly through the reserve, but the money is mostly going into build out of the facilities.

My overall take is that there is a fair degree of risk in Dendreon right now, but the upside potential to the stock in the 2011 to 2012 time frame is high. Beyond that we can only speculate whether the success with prostate cancer will be repeated with other types of cancer.

You can also learn a lot about investing in biotechnology from studying Dendreon's history. See my Dendreon page for what this situation looked like in the past.

Friday, August 6, 2010

My vacation this year involved attending the marriage of my step son Evan on Whidbey Island near Seattle. Jan and I drove there with our dog, Hugo, staying at a La Quinta in Eugene, Oregon both coming and going. It is great that the hotel was dog friendly, and Hugo was a well behaved guest who liked walking in the part adjoining the hotel.

From Highway 1 all the way to Whidbey we saw roads being repaired, so I think the government infrastructure stimilus money is still, or maybe finally, at work. Hopefully the private industry workers improving the roads at public expense will also help revive consumer spending. We rented a house near the shore for a week and bought most of our provisions on the island, so maybe we helped the local economy there, while detracting from our home locale.

That said, I missed an important 10 days of economic reports. Jan had rented an Internet-free house; between that and the wedding preparations all I did was check my email and a few quarter results press releases for my clients.

Now I am back and starting to go over quarter results for the stocks I follow in the blog and at OpenIcon. The backlog list is: AKAM, CELG, DNDN, ONYX, HNSN, TTM, and MCHP. Next week we also have HILL and NVDA.

For me this is really homework: analyst conferences sometimes add insight to the numbers released, and sometimes don't. As usual I will post my analyst conference summaries at OpenIcon and post my commentary in this blog.

I have a few things to say about the economy, too, but first I want to catch up on business results.